SECTION TWO: Provide clear and concise answers to each question. Clearly and com
ID: 1129789 • Letter: S
Question
SECTION TWO: Provide clear and concise answers to each question. Clearly and completely label any graphs used in your answers. The points assigned to each question are in parentheses after the question 1. Differences in market structure help determine the outcomes in a market (price, quantity, profitability, etc.). Explain why an imperfectly competitive firm that advertises and gains brand name recognition can charge a higher markup of price over marginal cost that can a firm without brand name recognition. A. Assume we have two markets. Market A has a large number of sellers, each seller is selling a homogeneous product, and there are no barriers to entry to the market. Market B also has a large number of sellers, each seller sells a differentiated product, and there are no barriers to entry. What can we conclude about each of the following when comparing the two markets? B. (I) In which market(s) would the price be above the marginal cost of production at the profit-maximizing level of output? Explain. (4) (2) In which market(s) would the seller be able to earn positive long-run economic profits? Explain. 4) (3) In which market(s) would the seller not be able to price discriminate? Explain. (4)Explanation / Answer
1. A) a firm that advertises gain public confidence and generate brand value in the market. When people have confidence on the brand its demand for product is less elastic.
On the other hand firm which does not advertise does not have brand value. People are not confident about the product and as a result demand is elastic.
Inelasticity implies increase in price will not reduce the demand much. Thus advertising firm can charge higher price add they consumers will not reduce their demand.
B. 1) market B will have price above marginal cost.
This is so because firms are selling differentiated products which give certain market power to firms. They charge higher price, due to lack of comparability between goods.
2. No market can have positive economic profit in the long run because there is free entry and exit to firms. So if firms are earning profits in the short run new firms will enter and reduce the profit to zero.
3. Market A, sellers will not be able to price discriminate because all the sellers are selling homogenous good and there are many sellers. So even if one seller charges higher price the buyer can go to another seller.
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